REPUBLIC OF THE PHILIPPINES

Coon or Tax Appeals

QUEZON CITY

SECOND DIVISION

OAKWOOD MANAGEMENT C.T.A. CASE NO. 6758

SERVICES (PHILIPPINES), INC.,
Petitioner,
Members:

CASTANEDA, JR., Chairperson

-versus- UY, and
PALANCA-ENRIQUEZ, JJ.

COMMISSIONER OF INTERNAL Promulgated:

REVENUE, Respondent. SEP 0 6 2007/

X- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -¥----------
X

DECISION
CASTANEDA, JR., d_.:

This is a Petition for Review seeking a refund of or issuance of a tax

credit certificate in the amount of P235,329.65 allegedly representing the

amount of surcharges, interests and compromise penalties erroneously paid

and remitted for 2000 and 2001 .

Petitioner is a domestic corporation duly organized and existing under

the laws of the Philippines; and has principal office address at 61h Floor ~
DECISION
C.T.A. CASE NO. 6758
Page 2 of 12

Glorietta 4, Ayala Center, Makati City. 1 It is engaged in the business of

managing and operating service apartments in the Philippines.2

Respondent is vested by law to enforce and implement the provisions

of the National Internal Revenue Code ("NIRC"), other related statutes and

their implementing rules and regulations, including inter alia, the power and

authority to act and decide upon applications for refund or tax credit of excess

internal revenue tax payments, to issue deficiency tax assessment, to

evaluate and decide on the merits disputed assessments pursuant to law, with

office address at SIR National Office Building , Diliman , Quezon City.3

On January 15, 2000, petitioner allegedly entered into a Service

Agreement with Oakwood Asia Pacific Limited ("Oakwood Asia"), a non-

resident foreign private limited corporation duly incorporated and existing in

Labuan, Malaysia.4 According to the agreement, Oakwood Asia shall provide

general consultancy and management, training and personnel development,

financial and budgetary planning , and marketing services in the interest of

petitioner. In consideration of the said services, petitioner shall pay Oakwood

Asia , a service fee in the sum of P4,000,000.00, or its equivalent in any other

foreign currency to be designated by Oakwood Asia , for 2000; and

P500,000.00, or its equivalent in any other foreign currency to be designated

by Oakwood Asia , per month beginning January 1, 2001. 5

On February 7, 2001 , petitioner filed with the SIR-National Office a

request for confirmation that the Service Fees payable by petitioner to p-c--
1
Paragraph 1 of the Joint Stipulation of Facts; docket, p. 192.
2
Paragraph 1 of Exhibit AA .
3
Paragraph 2 of the Joint Stipulation of Facts; docket, pp. 192- 193.
4
Exhibit YY; docket, pp. 511 -5 17.
5
Docket, pp. 512-513 .
 DECISION
C.T.A. CASE NO. 6758
Page 3 of 12

Oakwood Asia under the SA are exempt from value-added tax ("VAT") in view

of the fact that the Service Fees are being paid for services performed

offshore by a non-resident foreign corporation .6

On July 25, 2001 , petitioner started to file and remit, in behalf of

Oakwood Asia , returns for the 10% VAT (including the corresponding

surcharges, interests and compromise penalties) on Service Fees paid by

petitioner to Oakwood Asia for the years 2000 and 2001 , evidenced and

summarized as follows :
ITABLf 1 Oflldal PENALTIES Total
Tax Period Date FUed/Paid Recelet No VAT Paid EJdl. Sudla~ EJdl. Interest Exh. Co.-,rommse Exh. Total Ex h. Palments EJdl.

4th Quarter of 2000 Aug-22-2001 712381 (Exh. A) p 400,000.00 11-2 100,000.00 8-3 46,165.75 11-4 16,000.00 11-5 162,465.75 8-6 562,465.75 11-7
Jan 2001 Aug-22-2001 712382 (Exh. C) 50,000.00 D-2 12,500.00 D-3 4,958.90 J)-4 1,000.00 o-s 21,458.90 J)-6 71,158.90 [).7
Fd> 2001 Aug-22-2001 712383 (Exh. E) 50,000.00 F-2 12,500.00 F·J 1,191.78 f-4 F-5 16,691.78 F-6 66,691 .78F-7
1st Quarter of 2001 Aug-22-2001 712384 (Exh.G) 150,000.00 H-2 37,500.00 H_.. 12,493.15 H-5 .., 000.00 H-6 53,993.62 H-7 65,842 .47H-8
""'2001 Aug-22-2001 712385 (Exh. I) 50,000.00 l -2 12,500.00 l -3 2,520.55 J-4 l-5 15,020.55 J-6 65,020.55 J-7
May 2001 Aug-22-2001 712386 (Exh. IC) 50,000.00 l -2 12,500.00 l-3 1,671.23 l-4 l -5 14,171.23 l-6 64, 171.23l -7
2nd Quarter of 2001 Ju-25-2001 712074 (Exh. M) 50,000.00 N-2 N-3 50,000.00 N.....
JU 2001 Aug-(19-2001 712212 (Exh.O) 50,000.00 P-2 P-3 50,000.00 P-4
Aug 2001 Sep-IQ-2001 (Exh. Q) Q-2 Q-4 Q-5
Jnj Quarter of 2001 Oct-25-2001 """'
755804 (Exh. R) 100,000.00 S-2 5-5 100,000.00 P-4 &.S-6
Oct 2001 Nov-(19-2001 756114 (Exh. T) 50,000.00 U-2 U-3 50,000.00 U-1
Nov 2001 Dec-10..2001 rooe (Exh. V) V-2 V-4 V-5
4th Quarter of 2001 Jan-25-2002 (Exh. W) W-4 W-5 W-6
"""' 1,000,000.00 187,500.00 72,301.36 24,000.00 283,801.83 1,145,650.68

On August 21 , 2002 , respondent, through BIR Legal Services Assistant

Commissioner Milagros V. Regalado , issued BIR Ruling No. DA-ITAD-145-02

and, among others , ruled :

"3. Whether the service fees and reimbursement are not

subject to value-added tax in view of the fact that the services
therein being remunerated are performed outside of the
Philippines and the reimbursements pertain to such services so
rendered.

Inasmuch as it has been the representation that the

abovementioned services will be performed by Oakwood Asia in
Malaysia or in some other jurisdiction outside the Philippines
and from time to time. Oakwood Asia may have to send its
personnel to the Philippines, for short periods which should not,
in aggregate, exceed 183 days in any calendar year, the fees
paid by Oakwood Phils. [petitioner) for services rendered in the

6
Par. I 0 of Joint Stipulation of Facts; docket, p. 195 .
DECISION
C.T.A. CASE NO. 6758
Page 4 of I2

Philippines are subject to the 10% value-added tax pursuant to

Section 108 of the Tax Code of 1997. Accordingly, Oakwood
Phils. [petitioner] being the payor in control of the payment shall
be responsible for the withholding of VAT on such fees on behalf
of Oakwood Asia by filing a separate VAT return for and on
behalf of Oakwood Asia using BIR Form No. 1600 (Monthly
Remittance Return of Value-Added Tax and Other Percentage
Taxes Withheld) . The duly filed BIR Form 1600 and proof of
payment thereof shall serve as sufficient basis for the claim of
input tax to be applied against the output tax that may be due
from Oakwood Phils. [petitioner] if it is a VAT-registered
taxpayer. In case Oakwood Phils. [petitioner) is a non-VAT
registered taxpayer, the passed-on VAT withheld shall form part
of the cost of the service purchased or treated as expense,
whichever is applicable. In addition, Oakwood Asia Phils.
[petitioner] is required to issue the Certificate of Creditable Tax
Withheld at Source (BIR Form 2307) in quadruplicate upon
request of Oakwood Asia , the first three copies thereof to be
given to Oakwood Asia and the fourth copy to be retained by
Oakwood Phils. [petitioner] as its file copy . (Section 4 & 6,
Revenue Regulation 4-2002)

It will be noted that the Philippines has an existing treaty

with Malaysia for the avoidance of double taxation . However,
inasmuch as all the subject services will be performed by
Oakwood Asia outside of the Philippines, as represented , the
said RP-Malaysia tax treaty will have no application as the
transaction does not give rise to a case of double taxation.
Under the Tax Code of 1997. non-resident foreign corporations
are taxable only for income derived in the Philippines . Relative
thereto. compensation for labor or personal services performed
outside the Philippines are not income from sources within the
Philippines."7 (Underscoring Supplied)

On August 20, 2003, petitioner filed an administrative claim for refund

with the respondent in the amount of P235,329.65 representing the amount of

allegedly erroneously paid surcharges, interests and compromise penalties

paid for the year 2001 .8

On August 21 , 2003, because of respondent's inaction on its claim for

refund , petitioner instituted the present Petition for Review before this Court. fJk-
7
Exhibit AA
8
Par. I I of the Joint Stipulation of Facts; docket, p. I95 .
DECISION
-.T.A. CASE NO. 6758
Page 5 of 12

In his Answer, filed on October 13, 2003 , respondent alleged the

following special and affirmative defenses :

"6. Petitioner's alleged claim for refund is still subject

to administrative routinary investigation/examination by the
respondent's Bureau;
7. Taxes paid and collected are presumed to have
been made in accordance with law, hence, not refundable;
8. Petitioner failed to prove the following:
a. That the total amount of P235,329.65
representing alleged aggregate amount of surcharge,
interest and compromise penalty erroneously paid on
the excess withholding VAT withheld for the taxable
year 2001 were fully substantiated .
b. That petitioner failed to prove that the
alleged VAT payments from which the taxes were
withheld were included in its gross receipts for taxable
year 2001 ;
9. Assuming but without admitting the fact that
petitioner is entitled to tax refund , it is incumbent upon the latter
to show that it has complied with the provisions under Sections
204 in relation to Section 230 (now 229) of the Tax Code.
Otherwise, its failure to prove the same is fatal to its claim for
refund ;
10. Claims for refund are construed strictly against the
claimant for the same partakes the nature of exemption from
taxation xxx and as such , they are looked upon with disfavor
xxx." 9

Petitioner presented its testimonial and documentary evidence; while

respondent, through counsel , submitted the case for decision based on the

pleadings after he manifested that this case has no report of investigation .10

On January 18, 2007, the case was submitted for decision after

petitioner filed its Memorandum on April 19, 2006 and for respondent's failure

to file a Memorandum within the prescribed period .11 ~

~ Docket, pp. 164- 165 .

10
Docket, p. 439.
II Ibid.
DECISION
C.T.A. CASE NO. 6758
Page 6 of 12

The parties jointly stipulated that the issues to be resolved by this Court

are as follows :12

"1. Whether or not the service fees payable by

petitioner to Oakwood Asia under the Service Agreement are
exempt from VAT to the extent that they pertain to services
outside of the country.

2. Whether or not SIR Ruling No. DA-ITAD-145-02

dated August 21 , 2002 is applicable to the issues involved in the
instant case.

3. Whether or not petitioner incurred

erroneous/excessive payments of surcharge, interest and
compromise penalty on withholding VAT imposed on Service
Fees.

4. Whether or not the allocation of the Service Fees

considered subject to VAT correct.

5. Whether or not petitioner is entitled to the refund of

the excess surcharges, penalties and interests previously
imposed on the VAT payment on the portion of the Service Fees
otherwise exempt from VAT.

6. Whether or not petitioner's alleged

erroneous/excessive payments of surcharge, interest and
compromise penalty on withholding VAT imposed on Service
Fees for the year 2001 were duly substantiated.

7. Whether or not petitioner is entitled to the refund or

issuance of a tax credit certificate in the sum of P235,329.65 as
alleged erroneous/excessive payments of surcharge, interest
and compromise penalty on the withholding VAT erroneously
imposed on the full amount of the Service Fees earned by
Oakwood Asia from fourth quarter of 2000 to May 2001 and
remitted to the SIR in 2001 ."

Section 108 of the NIRC states:

"SEC. 108. Value-Added Tax on Sale of Services and

Use or Lease of Properties. -

"(A) Rate and Base of Tax. - There shall be levied ,

assessed and collected , a value-added tax equivalent to ten
12
/bid. , pp. 195-196.
DECISION
C.T.A. CASE NO . 6758
Page 7 of 12

percent ( 10%) of gross receipts derived from the sale or

exchange of services, including the use or lease of properties.

"The phrase 'sale or exchange of services' means the

performance of all kinds of services in the Philippines for others
for a fee , remuneration or consideration , including those
performed or rendered by construction and service contractors;
stock, real estate, commercial , customs and immigration
brokers; lessors of property, whether personal or real ;
warehousing services; lessors or distributors of cinematographic
films ; persons engaged in milling , processing , manufacturing or
repacking goods for others; proprietors, operators or keepers of
hotels, motels, resthouses, pension houses, inns, resorts;
proprietors or operators of restaurants , refreshment parlors,
cafes and other eating places, including clubs and caterers ;
dealers in securities; lending investors; transportation
contractors on their transport of goods or cargoes , including
persons who transport goods or cargoes for hire and other
domestic common carriers by land , air and water relative to their
transport of goods or cargoes; services of franchise grantees of
telephone and telegraph , radio and television broadcasting and
all other franchise grantees except those under Section 119 of
this Code; services of banks, non-bank financial intermediaries
and finance companies; and non-life insurance companies
(except their crop insurances), including surety, fidelity,
indemnity and bonding companies; and similar services
regardless of whether or not the performance thereof calls for
the exercise or use of the physical or mental faculties . The
phrase 'sale or exchange of services' shall likewise include:

"xxx XXX xxx."

From the above section, it is clear that the service fees payable to

Oakwood Asia under the Service Agreement are not subject to VAT insofar as

the services performed or rendered outside the Philippines. However, the law

subjects the services performed or rendered in the Philippines subject to VAT.

Now, the uncontroverted evidence shows that petitioner paid and

remitted the 10% VAT, including the surcharges, interest, and compromise,

without regard as to whether the services were performed in or out of the r--
 DECISION
r..T.A. CASE NO. 6758
Page 8 of 12

Philippines. 13 Petitioner is therefore correct in asserting the need to allocate

the service fees between services actually rendered in the Philippines and

those performed outside the Philippines to determine the portion of the

service fees subject to VAT.

Three (3) employees of Oakwood Asia went to the Philippines in 2000

and 2001. 14 Their names as well as their corresponding number of days

stayed are summarized as follows :

No. of days within

the Philipines
Name Position CY 2000 CY 2001 TOTAL
1 Mr. Puryan Karimbil G. Mathew Managing Director 32 17 49
2 Ms. Catherine McNabb Director of Sales & Marketing 0 5 5
3 Ms. Chai Soo Chaio Financial Controller 0 2 2
TOTAL
- - -32
- 24 56
===

Each employee has 261 working days per year, or the three employees

have an aggregate of 783 working days per year. The estimated daily rate

per employee is computed by dividing the service fee per year by the total

number of mandays. Thus , for 2000, the daily rate is P4,000,000.00/783

mandays, or P5, 108.56; for 2001 , the daily rate is P6,000,000.00/783

mandays, or P7,662.84.

Based from the above summary and estimated daily rate per

employee, the portion of Service Fees that may be allocated to services

performed within the Philippines is P163,473.92 (P5,108.56 X 32 days) for

13
See Exhibits A toW, and BB to KK.
14
Exhibits LL, MM and attached copies of Oakwood Asia's employees' dul y stamped passports.
DECISION
C.T.A. CASE NO. 6758
0
age 9 of 12

2000. The portion of Service Fees that may be allocated to services

15
performed within the Philippines for 2001 is computed as follows :

Allocated Monthly
Month No. of Days Service Fees
(A~ (B~ (B X P7,662.94~

January 6 45,977.04
February 1 7,662.84
March 0 0
April 0 0
May 2 15,325.68
June 5 38,314.20
July 0 0
August 2 15,325.68
September 3 22,988 .52
October 3 22,988 .52
November 0 0
December 2 15,325.68
24 183,908.16

On the basis of the allocation, the amount of VAT due on the Service

Fees earned by Oakwood Asia for services performed within the Philippines

can be determined by multiplying such Service Fees with the VAT rate of

10%. For 2000, the 10% VAT due is P.16,347.39; while for 2001 , the amount

of VAT due is P18,390.81 .

Considering the VAT on the Service Fees reported and remitted by

petitioner for 2000 and 2001 were based on the full amounts of the Service

Fees actually paid to Oakwood Asia , which included non-VATable portions

pertaining to services performed outside the Philippines, the VAT payments

made in said years were erroneous and excessive. And , since the penalties,

surcharges and interests actually paid by petitioner were based on actual VAT

payments which were erroneous, such penalties, surcharges and interests

were likewise erroneous and excessive. Section 204(C) in relation to Section

229 of the 1997 NIRC, provide: ~

ts Id.
DECISION
C.T.A. CASE NO. 6758
Page 10 of 12

"SECTION 204. Authority of the Commissioner to

Compromise, Abate and Refund or Credit Taxes. - The
Commissioner may -
(A) XXX
(8) XXX
(C) Credit or refund taxes erroneously or illegally received or
penalties imposed without authority, refund the value of internal
revenue stamps when they are returned in good condition by the
purchaser, and , in his discretion, redeem or change unused
stamps that have been rendered unfit for use and refund their
value upon proof of destruction. No credit or refund of taxes or
penalties shall be allowed unless the taxpayer files in writing
with the Commissioner a claim for credit or refund within two (2)
years after the payment of the tax or penalty: Provided ,
however, That a return filed showing an overpayment shall be
considered as a written claim for credit or refund .

XXX XXX X X X."

"SECTION. 229. Recovery of Tax Erroneously or

Illegally Collected - No suit or proceeding shall be maintained
in any court for the recovery of any national internal revenue tax
hereafter alleged to have been erroneously or illegally assessed
or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been
excessively or in any manner wrongfully collected , until a claim
for refund or credit has been duly filed with the Commissioner,
but such suit or proceeding may be maintained , whether or not
such tax, penalty, or sum has been paid under protest or duress.

In any case , no such suit or proceeding shall be filed after

the expiration of two (2) years from the date of payment of the
tax or penalty regardless of any supervening cause that may
arise after payment: Provided, however, That the Commissioner
may, even without a written claim therefore , refund or credit any
tax, where on the face of the return upon which payment was
made, such payment appears clearly to have been erroneously
paid ." (Italics Supplied)

Consequently, the surcharges, interests and compromise penalties are

recomputed as follows : ~
 DECISION
C.T.A. CASE NO. 6758
Page 11 of 12

ITABLE 2
PeriodSer.;ces Date SeMce Fees VAT Date of Days 10%VATon PENALTIES Penalties Refirda~e

were rerdered were Paid due date Paym<rt Exh. Delay Ser.;ces Surtilar1)e(A) lnterest(B) Car4Jromise (Q Totai(X) Paid (Y) Exh. Amou"' (Y-X)

Year2000 February 2001 January 10, 2001 August22,2001 8·2 223 16,347.39 4,086.85 2,025.26 4,000.00 10,ll2.ll 162,465.75 B-6 152,353.64
Jan 2001 FeOOJaly 2001 February 12, 2001 August 22,2001 D-2 190 4,597.70 1,149.43 485.31 1,000.00 2,634.74 21,458.90 D-6 18,824.17
Feb 2001 February 2001 Marth 12, 2001 August 22,2001 F·2 163 766.28 191.57 346.95 400.00 938.52 16,691.78 F-6 15,753.26
Mar 2001 Marth 2001 April10, 2001 August22,2001 H-2 Ill 15,842.47 H-7 15,842.47
~2001 April2001 May 10,2001 August 22,2001 l-2 103 15,020.55 J-6 15,020.55
May2001 May 2001 llne ll, 2001 August22,2001 l-2 71 1,532.57 383.14 64.45 700.00 1,147.59 14,171.23 l-6 ll,023.64

23,243.94 5,810.99 2,921.97 6,100.00 14,832.95 245,650.68 p 230,817.73

(A) 25% (Section 248 oi1997Tax Code)

(B) 10% VAT X 20% X (Days Delay /360days) Section 249 ol1997 Tax Code
(C) Based on Re>ised stedue of Coolprorrise Penalties
(Rev. Memo. Or. No. 1-90, Nov. 28, 1989)

Petitioner, in its memorandum , is also claiming to refund the amount of

P-38,500.00 allegedly representing additional compromise penalties. Pursuant

to the above-quoted sections of the NIRC, the claim for refund pertaining to

this amount should be DENIED for the same was not included in petitioner's

administrative claim for refund as well as in this Petition for Review.

WHEREFORE , the Petition is hereby PARTIALLY GRANTED.

Respondent is ORDERED to REFUND petitioner the reduced amount of Two

Hundred Thirty Thousand Eight Hundred Seventeen and 73/100

(P-230 ,817.73) representing erroneously paid surcharges, interest and

compromise penalties.

SO ORDERED.

~et--.. ~ Q. Qwt-o-y (:4 \:::)

JUANITO c. CASTANEDA.~R.'
Associate Justice

WE CONCUR:
.
E~ UY
As~~~stice
~~EZ
Associate Justice
DECISION
C.T.A. CASE NO. 6758
~age 12 of 12

ATTESTATION

attest that the conclusions in the above Decision were reached in

consultation before the case was assigned to the writer of the opinion of the

Court's Division .

~~ c . GY--~/2;
fJ UANlTO c. CASTANEDA, ~R.
Associate Justice
Chairperson

CERTIFICATION

Pursuant to Article VIII , Section 13 of the Constitution , and the Division

Chairperson's Attestation , it is hereby certified that the conclusions in the

above Decision were reached in consultation before the case was assigned to

the writer of the opinion of the Court.

Q~lQ . ~
ERNESTO D. ACOSTA
Presiding Justice